USMCA to replace NAFTA treaty references

Tax Hot Topics newsletter The IRS released Announcement 2020-6 on May 19, 2020, providing that it will interpret references to the North American Free Trade Agreement (NAFTA) as being replaced by the United States-Mexico-Canada Agreement (USMCA) when the new agreement goes into force. Specifically, for purposes of applying an applicable U.S. income tax treaty, the IRS believes that any reference to NAFTA in a U.S. bilateral income tax treaty should be interpreted as a reference to the USMCA. The announcement also provides that the IRS will reach out to countries that have an applicable tax treaty containing references to NAFTA to confirm that they agree with this interpretation.

This announcement is important for taxpayers relying on certain tests in the “Limitation on Benefits” (LOB) article of a relevant bilateral income tax treaty. Most U.S. bilateral income tax treaties contain LOB articles that provide provisions designed to prevent entities resident in a treaty jurisdiction from inappropriately accessing tax treaty benefits. Many LOB articles in U.S. bilateral income tax treaties provide a series of objective tests pursuant to which a resident may qualify for a treaty benefit provided such resident meets all other requirements specified in the treaty for claiming the benefit. A number of these LOB tests contain explicit references to NAFTA in various contexts (e.g., stock exchanges located in the United States or another country party to NAFTA, certain ultimate owners must be resident in a NAFTA country). Taxpayers were concerned that, in situations where they were relying on a LOB article that referenced NAFTA, such benefits would no longer be available if the NAFTA were to be replaced with the USMCA. However, the announcement quells concerns of taxpayers and indicates the IRS’s view that any reference to NAFTA should be interpreted as being to USMCA.

Taxpayers should also be aware that a similar issue exists with respect to the United Kingdom’s departure from the European Union (EU). Similar to the NAFTA references, many treaties with European counterparties include similar references to the EU. With Brexit, similar concerns exist as to the qualifications for treaty benefits under an LOB article where the taxpayer was relying on the UK being a member of the EU. See Grant Thornton’s prior coverage on this issue and the USMCA here.

David Sites
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Yasmin Dirks
Washington National Tax Office
T +1 202 521 1506

Mike Del Medico
Washington National Tax Office
T +1 202 521 1522

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.